NEW YORK (CNN/Money) -The U.S. unemployment rate fell to 5.5 percent in February and businesses added jobs for the first time since last summer, the government said Friday, as the labor market began to recover from a downturn that led to more than a million job cuts in 2001.

Though some positive aspects of the report were due to seasonal quirks, it nevertheless took economists by surprise and reaffirmed Federal Reserve Chairman Alan Greenspan's assessment Thursday that the nation's first recession in a decade was over.

The jobless rate fell from 5.6 percent in January as employers added 66,000 jobs to payrolls, versus a revised loss of 126,000 jobs a month earlier, the Labor Department reported. Economists had forecast an unemployment rate of 5.8 percent and little change in payrolls, according to Briefing.com.

"This is one more in a very long list of indications that have shown in the past month that this economy is busting out of recession," said David Kelly, economist with Putnam Investments. "This is not just a slow, mild rebound. It's a much stronger rebound than people expected."

February was the first month in which jobs were added since July 2001. About 1.4 million jobs have been lost since March 2001, when a recession, as defined by the National Bureau of Economic Research, began.

But the Labor Department and other economists pointed out that January's job-cut number was worse than the 89,000 initially reported. And many of the 66,000 jobs added in February were due to unusual seasonal employment patterns in retail trade, favorable weather for construction, and a return from temporary plant shutdowns in automobile manufacturing, the department said.

"The unemployment situation won't truly improve until businesses increase hiring a lot more than they did in February," said Bill Cheney, chief economist at John Hancock Financial Services. "It takes roughly 150,000 new jobs per month just to keep the unemployment rate steady, as population growth increases the work force."

On Wall Street, stocks rose in early trading, but Treasury bond prices fell as investors in the bond market worried an economic recovery could spur inflation.

Labor force grows

The report was especially surprising because the unemployment rate typically lags the rest of the economy, worsening even as the economy recovers because businesses usually delay hiring until they're convinced a rebound is under way.

The unemployment rate also fell in January, but some economists attributed the drop to a shrinking labor force, since it seemed some workers had stopped looking for jobs, taking themselves out of the labor force. But the labor force grew by 821,000 in February, making the drop in the unemployment rate more meaningful.

What's more, the number of people who still want a job but haven't looked for one in four weeks - meaning they're no longer counted as part of the labor force - fell by 449,000.

But some economists still were hesitant to read too much into the report, expressing skepticism that the labor market could possibly be bouncing back so soon.

"A drop of one-tenth of a percent is not statistically significant, and a 66,000 increase in payrolls is still tiny" said Maury Harris, chief economist at UBS Warburg.

"You typically see a rebound in the labor force when the economy starts to recover," Harris added. "But because businesses are operating so much more efficiently, there's a limit to the number of jobs available. Unemployment could still go up a few ticks."

President Bush said he was encouraged by the report, but was still concerned about the prospects for unemployment going forward.

On Capitol Hill, the Democratic-controlled Senate on Friday approved an economic stimulus package that temporarily extends unemployment benefits and gives tax breaks to businesses. Bush has said he will sign the bill, though it is significantly scaled back from a package passed last year by the House, which the Bush administration had favored.

To keep consumers spending despite more than a million job cuts in 2001, the Fed cut its target for short-term interest rates 11 times last year. But it decided to leave rates alone at its first meeting in 2002, and some economists have begun to speculate about when the Fed will start to raise rates again.

Fed policy makers next meet on March 19, and many observers think they will announce after that meeting that their "bias" has changed from worry about economic weakness to a neutral stance.

"The small improvement in labor market conditions, despite the continued risks that remain on this front, do suggest that even with all the caveats that Greenspan echoed in his latest testimony ... the Fed might be inclined to move towards a neutral risk bias," said Anthony Chan, chief economist at Banc One Investment Advisors.

Chan also pointed out that a flat average work week of 34.1 hours and flat manufacturing overtime hours of 3.9 per week demonstrate that the labor market doesn't seem ready to overheat anytime soon.

"The inability of the work week to move sharply higher still indicates that the unemployment is likely to move higher before it moves lower again," he said.

And average hourly earnings rose only slightly, to $14.63 from $14.61, indicating labor costs should remain, keeping inflation in check and possibly influencing the Fed to keep interest rates lower for a longer time.

The beleaguered manufacturing sector shed 50,000 jobs in February, the lowest number of job losses in the sector since a loss of 33,000 jobs in December 2000. Nearly 1.7 million jobs have been lost in the sector since July 2000, the last month manufacturing jobs expanded.

Manufacturing was in a recession for 19 months, the result of a slowdown in business spending on goods and factory equipment at the end of the spending boom of the late 1990s. But the nation's purchasing managers said recently that the sector expanded in February, raising hopes that the broader economy was also on the mend.

The retail sector, on the other hand, added 58,000 jobs, its best performance since April 2001, when it added 73,000 jobs. And the economy added 40,000 services jobs, the sector's third straight month of growth following dramatic cuts of 139,000 and 106,000 in September and October, respectively.